Mortgage Lenders Still Shunning Subprime Borrowers

The foreclosure crisis is receding, but it has having an enduring impact on lenders' risk appetites.

Only 8% of mortgage origination volume in the second quarter went to borrowers with credit scores of 660 or lower, according to a new study by researchers at the Federal Reserve Bank of New York. Even during the economic depths of 2009, borrowers within that credit score range, which is generally considered subprime, got a bigger share of the nation's total mortgage volume.

"Underwriting standards for mortgages have loosened only slightly in the years since the Great Recession," the New York Fed researchers wrote in a blog post accompanying the data's release.

The researchers found that the median Equifax Risk Score of a mortgage borrower in the second quarter of 2015 was 764. During the heyday of subprime mortgages in 2006, that figure dropped to as low as 707. It fell to 698 during the dot-com boom of 2000.

While the share of mortgage volume that goes to subprime borrowers has rebounded a bit — it bottomed out at 5.8% in the first quarter of 2011, after peaking at 26% four years earlier — many observers believe that industrywide credit standards remain too tight.

"Recent improvements in credit availability have yet to approach any sort of normal state, and that's driven by a range of issues from regulatory uncertainty to lingering effects on lenders and investors from the economic crisis," Marina Walsh, a vice president at the Mortgage Bankers Association, said in an email.

For those with pristine credit, getting approved for a mortgage is far less of problem. During the second quarter, 50% of U.S. mortgage origination volume went to borrowers with credit scores of 780 or higher, which is considered excellent. Another 26% of the volume went to those with credit scores between 720 and 779.

"Persistently tight underwriting standards imply that new mortgages continue to be originated predominantly to the most creditworthy borrowers," Wilbert van der Klaauw, senior vice president at the New York Fed, said in a press release.

The New York Fed's study does not shed light on the factors behind the upward shift in average credit scores for mortgage borrowers. In some cases, consumers with poor credit scores may be discouraged from even applying for a loan because they assume they will get rejected.

Meanwhile, for Americans who already have mortgages, the outlook continues to improve.

During the second quarter, the 90-day delinquency rate on mortgages fell to 2.51%, which was its lowest level since the third quarter of 2007, according to the New York Fed. And the fewest number of people in the 16-year history of the data had a new foreclosure notation added to their credit reports.

What's more, the percentage of mortgages that was in some stage of the foreclosure process fell to 2.09% during the second quarter, its lowest level since the fourth quarter of 2007, according to data released Thursday by the Mortgage Bankers Association.

The two trends — rising average credit scores and improved rates of repayment — appear to be related.

"Borrowers with weaker credit who would have had ready access to credit precrisis are not always able to get access today," Walsh said. "Certainly this means the borrowers who are able to obtain credit are generally less likely to find themselves delinquent on loan payments, and overall performance is strong as a result."

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